Your company is considering a machine that will cost $ 4,520 at Time 0 and which...

Your company is considering a machine that will cost $ 4,520 at Time 0 and which can be sold after 3 years for $ 872 . To operate the machine, $ 490 must be invested at Time 0 in inventories; these funds will be recovered when the machine is retired at the end of Year 3. The machine will produce sales revenues of $ 1,178 /year for 3 years; variable operating costs (excluding depreciation) will be 41 percent of sales. Operating cash inflows will begin 1 year from today (at Time 1). The machine is in the 3-year MACRS class. The MACRS class has depreciation of 33% in year 1, 45% in year 2, 15% in year 3, and 7% in year 4. The company has a 31 percent tax rate, enough taxable income from other assets to enable it to get a tax refund from this project if the project's income is negative, and a 10 percent cost of capital. Inflation is zero. What are the terminal cash flows associated with ending this project? Note, I want only the Year 3 terminal cash flows, not the year 3 operating cash flows. Show your answer to the nearest $.01 Do not use the $ symbol in your answer

Expert Solution

MARCS depreciation

Year 1=4,520 *33%=1491.6

Year 2=4,520 *45%=2034

Year 3=4,520 *15=678

Book Value at the end of year 3= 4,520-1491.6-2034-678=316.4

Tax on sale of Scrap = (Sale price- Book Value)*0.31=(872-316.4)*.31=555.6*.31=172.24

Salvage Value= Sale of Scrap+Recovery of Inventories=872+490=1362

jeff jeffy answered 2 years ago

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